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Price discrimination

Price discrimination is a microeconomic pricing strategy where identical or largely

similar goods or services are transacted at different prices by the same provider
in different markets.
Types of price discrimination
1)First degree price discrimination-Refers to a situation in which monopolist
charges maximum prices to the customers that the consumer is willing to
pay.It is also called as personal price discrimination as it involves maximum
exploitation of consumers
EX: Doctors charges low prices from poor patients while relatively higher prices from
rich patients. Similarly doctors charges price from its clients depending upon the
risk involved or the amount in the transaction. They charges prices according to the
income of the people. Consumers are divided into different groups according to their
income level.
2)Second degree price discrimination-Refers to a price discrimination in
which buyers are divided into groups and different prices are charged from
these groups depending upon what they are willing to pay.
EX: Railways, airlines.
3)Third degree price discrimination-Refers to a price discrimination in which
monopolist divides the entire market into sub-markets and different prices
are charged in each sub-market. It can also be defined as charging different
price from different consumer group.
EX: Railways charges lower fares from senior citizens, students get discount at
cinemas, museums, historical monuments.
Pros and cons of price discrimination
Pros: Allows an unprofitable business to avoid going bankrupt.
Some groups benefits from cheaper prices.
To avoid congestion. Its one way to manage demand.

Some consumers will end up paying higher prices.

Those who pay higher prices may be the poorest. E.g. adults could be
Inaccurate estimation of customers buying capabilities.

Necessary conditions for price discrimination

The firm has the market power to set its own prices.
The firm must be able to separate the market and prevent resale.
There must be consumers with different elasticity of demands.


Age Discount
A popular way to segment the market is by age category, e.g. students & OAPs
often get discounts, such as 10% off. For rail travel, people with rail cards can get
upto 33% off. The popularity of age discounts is that it is relatively easy to segment
the market. Also, different age groups generally have different elasticity of demand.
Students and OAPs have lower income than working adults and so are more
sensitive to changes in price.
Loyalty cards
Some coffee shops offer a reward to regular consumers. If you buy nine coffees, you
get the tenth free. This is a reward for buying a higher quantity.
Resident parking charges
In some tourist cities, residents get lower prices for public transport and parking.
This is because tourists tend to have more inelastic demand. Also residents use the
facilities throughout the year and contribute more taxes. Tourists will have greater
demand during the peak holiday season.
Firms often give coupons to selected consumers. For example, Tesco may send
coupons to regular customers to get special offers, e.g. 20% off selected items.

These coupons are often highly targeted to your spending habits. This is an indirect
way of segmenting the market.


Time of buying ticket - If we buy a ticket several months in advance it tends to be
cheaper. If demand for the particular flight is high, then the airline starts putting up
the price of that flight. It means that the remaining tickets will only be bought by
people willing to pay a higher price. If a particular flight is not selling very well, the
airline will do the opposite and reduce price.
Unsocial hours cheaper - Because some flight times are less popular, these
flights will tend to be cheaper. For e.g., if take a weekend break. Most people would
prefer to come back late on Sunday. These late Sunday flights tend to be more
expensive than early morning Sunday flights.
When to travel - Travelling at peak times will be much more expensive. One good
example is travelling during the week. Their demand tends to be more inelastic
Airfares also vary depending on the time of the year. During peak summer holidays,
airfares are more expensive.
Charging for extras Airlines has become expert at charging for extras like check
in luggage. It means consumers who are less sensitive to price, may pay to enter
plane early, and pay to have a check in bag.
Air miles Air miles isnt really price discrimination, but it is a way of rewarding
loyal consumers.

Perfect Competition
Large number of buyers and sellers no individual seller can influence price.Free
entry and exit to industry, Homogenous product identical so no consumer
preference. Sellers are price takers have to accept the market price.Perfect
information available to buyers and sellers. Examples -Financial market stock
exchange, parts of agriculture.
Many buyers and sellers, Products differentiated, Relatively free entry and exit,Firm
has some control over price.Examples restaurants, professions ,Retail trade etc.

Few sellers of a product selling identical or differentiated products. If selling

identical products-pure oligopoly. If selling differentiated products-differentiated
oligopoly .High barriers to entry, Products could be highly differentiated branding
or homogenous, Nonprice competition, High degree of interdependence between
firms. Examples Supermarkets, Banking industry, computer, steel, Chemicals, Oil,
Medicinal drug, Broadcasting.
One producer, large number of buyers, considerable power over price. Unique
product, High barriers to entry. Example-public utilities.
Price discrimination under different market forms
Perfect competition
In case of perfect competition price discrimination is not possible,even if the two
markets are kept separate. As market demand in each market is perfectly elastic,
every seller would try to sell in the market in which he could get the highest price.
As result of competition will start which will lead price to equate. Perfect
competition market doesnt satisfies the conditions of price discrimination as in it
firms are price maker but in perfect competition firms are price taker, the demand
curve slopes downward but perfect competition it is parallel to x-axis, the firm must
be able to separate the markets but in this case firm can not separate market as
demand is perfectly elastic as a result of which price will be equal.
Practically it is not possible but theoretically price discrimination in
perfect competition can be possible if all firms altogether decide to change
differentiated rate on the basis of income, quantity demanded and group.
The market is characterized by a single seller selling an unique product in the
market is called monopoly market. There is a single seller in the market called
monopolist. In monopoly market, monopolist doesnt faces any competition as he is
the sole seller of the product as there is no availability of close substitutes. Thus
monopolist sets the prices in such a way so that maximum profit is earned.
Monopolist charges the different prices from different customers for the same
product. This practice of charging different prices from different customers for the
identical product is called price discrimination. Monopolist practices this policy so as
to gain market advantage or capture market position.

Oligopoly is the form of market which has few sellers dealing with either
homogenous or differentiated products. Here there are small number of competing
firms. Every firm in the particular market has a belief that its actions will lead to
some or other form of non-negligible reaction from the other firms. It exists when
transportation cost limits the market area. For example, even though there are
many cement producers in India, competition is limited to the few local producers in
a particular area. The actions in each firm affects the other firm in the industry and
vice versa. For example, when General Motors introduced price rebates in the sale
of its automobiles, Ford and Maruti immediately followed with price rebates oftheir
own. The two contrasting behaviours of oligopoists arise that is cooperative
oligopolists where an oligopolist follows the pattern followed by rival firms and the
non-cooperative oligopolists where the firm does not follow the pattern followed by
rival firms. For example, A firm raises price of its product, the other firms may keep
their prices low so as to attract the sales away from the firm, which has raised its
Price discrimination is good where there is a genuine need of it. It may be
unpleasant for certain consumer groups but in a more utilitarian sense it is still
beneficial because it allows certain suppliers to keep running their firm and provide
necessary service important for standard of kiving of life. Thus it improves overall
economic welfare. However, it gives room for exploitation of different elasticities,
e.g. cons not being able to obtain life-saving treatment because it is simply too
expensive. Therefore overall argument is that it should be utilized where necessary
and this may enforced through gov regulation.